The Beirut Stock Exchange (BSE) is struggling to escape its downward trajectory as unrest in Syria continues to escalate.

In the week ending 26 August, the Blom Stock Index (BSI), which tracks the prices of all stocks listed on the BSE fell 1.12 per cent, hitting a two-year low of 1,285.11 points, wiping out $100m in market capitalisation.

Trading value on the BSE on 26 August was just $0.87m as the market capitalisation decreased by 0.38 per cent from the previous session to $11.13bn.

“Lebanon is experiencing a bit of downturn in terms of growth and has lagged behind,” says Liz Martins, senior economist at HSBC. The projected economic growth for this year is 2.8 per cent, down from last year’s 6 per cent, making it one of the slowest growing economies in the region.

While the country has not had political protests or uprisings, Lebanon has been affected by political risk in surrounding countries.

The ongoing violence and unrest in Syria is negatively affecting investor confidence especially for Lebanon’s banks, many of which operate in Syria. In July, US-based ratings company Moody’s Investor Services downgraded Bank Audi, Blom Bank, Byblos Bank and Bank of Beirut in asset quality from stable to negative due to their exposure to Syria.

The BSI peaked on 11 January closing at 1,538.10m, but has since then faced a downward trajectory losing close to 15 per cent since the beginning of the year. August has been a hard month for the whole region.

BSE’s market capitalisation fell 0.34 per cent in the first week of the month to $11.25bn.

Tourism has declined and there has been a slowdown in investment, particularly in the real-estate sector. The decline in investment means the government is struggling with a high trade and budget deficit.

Yet the impact of the US downgrade and the European debt crisis has not been as severe as it has been on other regional bourses since Lebanon’s public debt is financed mostly by the Lebanese banks.

“The banks are always cited as Lebanon’s redemption, they are more resilient and well capitalised and are a sort of support system to the economy,” says Martins.

It is their high liquidity that has spared the banks from the crashes seen elsewhere in the region as a result of the global financial woes. But a slowing economy has not helped the banks.

Share prices of the three largest lenders have fallen since the beginning of the year. Bank Audi has lost 17 per cent, Blom Bank’s shares fell by 12 per cent and Byblos Bank has experienced 11 per cent decline in its shares.

“This has been a difficult growth year, there isn’t much to drive the market forward unless the new government is big on reform, promotes privatisation and reduces the fiscal deficit,” says Martins.

Lebanon’s fragmented political system is one of its biggest setbacks. Decisions and reforms are very difficult to push through and the cabinet is on the verge of a split due to a controversial electricity bill that would see $1.2bn allocated to the energy ministry.

Until the new government can maintain unity, the BSE is likely to suffer from domestic political drama and the increasingly unstable Syria.